While representing business owners, I have had the privilege of assisting entrepreneurs that are willing to pursue an idea or potential business venture to eventually reap the rewards of being their own boss and building company from scratch. Entrepreneurs generally seem to have a more positive outlook than most and see the potential and upside to situations, while ignoring the downside more than others. With those rose-colored glasses, however, often comes unrealistic expectations that any potential issues they may face will be worked out amicably amongst themselves without evaluating and confronting potential issues and documenting their expectations in writing. While a handshake and verbal agreement may work out for some, too many times I have witnessed unresolved conflicts that result in time-consuming and expensive litigation for all involved, which could have otherwise been resolved more quickly and efficiently had the owners discussed and documented their expectations in writing.
In any business venture or enterprise it is important to be optimistic and be willing to take risks to pursue your goal, but it is also important to take those rose-colored glasses off for a moment, take a step back and discuss each owners’ expectations regarding the operation of the business and what happens if those expectations are not met.
Some basic issues and items all owners should consider at the start of their business are as follows:
- Each owner’s expectations regarding funding of the business. Are both owners obligated to provide equal contributions? What are the owners expected to contribute (i.e. labor, assets, funds, etc.)? What should happen if one owner cannot meet this expectation?
- How will major decisions be made? If owners are equal, what happens if there is a deadlock voting situation?
- Should ownership be restricted to the original owners? What happens if an owner wishes to transfer all or part of his or her ownership to a third party?
- What should happen in the event an owner dies, becomes disabled, competes with the business or gets a divorce? Will an owner’s heirs or representatives have the ability to take over ownership?
- Are all owners expected to work for the business? If so, what happens if an owner no longer works for the business or is terminated?
While some of the above items are difficult to discuss and resolve at the inception of a business, it is important to broach these subjects at the start of the business, prior to the time when the owners have exerted a substantial amount of time and resources into the venture. Properly documenting the resolution and owners’ expectations in writing in the business’s organizational documents will go a long way in resolving or preventing later conflict for all owners involved.
The information provided within this article is a broad overview and general discussion of only some of the major issues to consider when starting a business and is not intended to be legal advice. You should seek the advice of competent and qualified counsel to review your specific situation.